On March 5, 2020, the U.S. Court of Appeals for the Second Circuit heard argument on an appeal seeking to overturn judgment against contact lens distributor 1-800 Contacts (“1-800”) for antitrust violations relating to agreements with competitors on advertising keywords. This post follows our prior coverage of this matter, and is designed to highlight the increasingly common interaction between advertising, trademark, and competition law.
As we previously reported here, the Federal Trade Commission (“FTC”) alleged that 1-800 engaged in unlawful restraints of trade, in violation of Section 5 of the FTC Act, by resolving trademark infringement allegations against competitors with settlement agreements that generally (1) prohibited the competitors from using certain advertising keywords, including 1-800’s name; and (2) required the competitors to use negative keywords to prevent the competitors’ ads from appearing in response to searches for 1-800’s name. After a trial at the administrative level, the Administrative Law Judge found 1-800 was liable for anticompetitive conduct in violation of Section 5 of the FTC Act. In 2018, the FTC Commissioners issued a 3-1 ruling (reported on here) upholding the ALJ’s decision, which held that 1-800’s settlement agreements with competitors were anticompetitive and that (1) the FTC was not required to undertake an elaborate analysis to demonstrate anticompetitive effects, as the agreements’ restrictions on advertising were “inherently suspect,” and (2) the settlement agreements generally resulted in direct evidence of consumer harm, in the form of higher prices and a restriction of truthful advertising.
Arguments Presented to the Second Circuit
In briefing before the Second Circuit, 1-800 raised three primary arguments: (1) “commonplace” proceedings, like trademark settlements, are not subject to antitrust scrutiny, citing FTC v. Actavis, 570 U.S. 136 (2013) (finding that so-called “reverse” settlement agreements between pharmaceutical manufacturers may be subject to antitrust scrutiny when certain conditions are satisfied); (2) even if such settlements are subject to antitrust scrutiny, it is improper to apply an “inherently suspect” or “quick look” competitive analysis, rather than a full rule-of-reason analysis to assess anticompetitive effects; and (3) the Commissioners failed to account for 1-800’s pro-competitive justifications for the settlement terms governing advertising keywords, e.g. trademark protection and preference for settlement of claims, as well as the plausibility that consumers’ brand preference for 1-800 products resulted in higher prices, rather than the keyword advertising restrictions.
In response, the FTC argued that: (1) the Supreme Court’s Actavis decision does not immunize trademark settlements from antitrust scrutiny, but instead confirms that agreements settling intellectual property disputes are in fact subject to antitrust review; (2) the Supreme Court and the Second Circuit repeatedly have approved and applied the “quick look” standard, particularly where the plaintiff can show an adverse effect on competition—in this case, the FTC asserts higher prices and reduced consumer access to advertising; and (3) 1-800’s trademark rights (i.e., in precluding competitors from using the 1-800 trade name in advertising) do not trump antitrust scrutiny, particularly because the settlement terms governing use of keywords encompassed terms that did not raise trademark concerns and required competitors to withhold their advertising even when the competitor did not use 1-800’s trademarks.
Following argument, both the FTC and 1-800 submitted supplemental letter briefs to provide additional responses to the panel’s inquiries into whether any of the counterparties to the 1-800 settlement agreements tried to negotiate for permission to run paid search ads against 1-800’s trademarks, e.g., with a disclaimer of affiliation with 1-800. The FTC filed a letter brief on March 6, 2020, and argued that some competitors use “the very type of less restrictive, comparative advertisements about which the Court inquired — but 1-800 challenged those ads anyway,” and cited the example of a competitor that “used less restrictive, comparative advertisements.” In response, 1-800 filed a reply letter brief on March 9, 2020 contending that the FTC’s supplemental letter brief’s reference to the competitor in the FTC letter brief was not responsive to the Court’s inquiry because that competitor never entered one of the settlement agreements with 1-800 and otherwise disputed the FTC supplemental brief’s characterizations. The case now awaits a decision by the Second Circuit panel.
The potential for antitrust scrutiny, as triggered by agreements among competitors relating to advertising keywords, remains very real—with or without the existence of underlying intellectual property claims. Reed Smith is continuing to follow this matter closely and will report on the further developments. In the interim, please be sure to consult with experienced advertising and antitrust counsel before entering agreements with competitors concerning advertising and keywords.